Buy now pay later companies like Afterpay will be regulated overseas ‘as a matter of urgency’, despite managing to dodge Australian regulators

Afterpay (Joe Armao, SMH)
  • The UK financial regulator has found it ‘vital’ that buy now, pay later platforms like Afterpay and Zip face proper regulation overseas.
  • The Financial Conduct Authority (FCA) concluded that “changes are urgently needed to bring BNPL into regulation to protect consumers”.
  • While its UK arm Clearpay welcomed the recommendations, Afterpay has repeatedly fought similar efforts in Australia, with CEO Anthony Eisen calling such regulation ‘dangerous’.
  • Visit Business Insider Australia’s homepage for more stories.

Afterpay’s charm may only stretch so far, as overseas regulators refuse to permit it to run wild and free in the United Kingdom.

While the buy now, pay later (BNPL) darling has managed to win hearts and minds at watchdog ASIC, and among Australian senators, it’ll have to play by some much tougher rules abroad.

A UK review into the unregulated credit market concluded that it was paramount the BNPL sector, which has quadrupled in size in the space of 12 months, protected users.

“Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone,” chair Christopher Woolard said in a statement. “New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.”

“Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.”

It goes on to emphasis the need to regulate such platforms as “a matter of urgency” in order to address the existing “significant potential for consumer harm”. More than 5 million Brits use BNPL services, with 10% of bank customers with accounts already behind on their debts.

The UK’s Financial Conduct Authority (FCA) accepted the review’s recommendations, and agreed there was “a strong and pressing case to bring buy-now pay-later business into regulation.” It will now work with the UK government to design the rules that will govern Afterpay and others operating within the UK’s borders.

“Regulation would protect people who use BNPL products and make the market sustainable,” it concluded.

Australian customers still on their own

Crucially, such a clear call for regulation and consumer protections cuts sharply with the response of Australian regulators and policymakers who have been content to let the sector merely ‘self-regulate’.

This no less than a couple of short years after a royal commission found that such lenience had been thoroughly abused by Australia’s financial services sector.

In reality, that means that rather than implement legally-binding consumer protections, Afterpay and others are allowed to play by their own rules, as set out by a voluntary ‘code of conduct’ they drafted themselves.

The standard set out by the code however pales next to genuine regulation. It is not, and it does not carry any consequences for members who are found to contravene the rules. Even Zip co-founder Peter Gray is in favour of raising the bar.

While ASIC and a Senate committee have conducted their own reviews, both have concluded that self-regulation remains the name of the game, convinced by arguments that an inherent superiority to credit cards is virtue enough.

Curiously, Afterpay’s UK arm Clearpay “welcomed” the UK proposals.

“It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA,” Damian Kassabgi, executive vice-president of public policy, said in a statement.

Quite a change from Afterpay CEO Anthony Eisen’s position who described regulation to a Senate committee as “dangerous”, claiming it would “stifle innovation and competition”.

Such leeway in Australia has no doubt helped accelerate the unbridled growth of the sector, not to mention the stock price of Afterpay, hurtling its founders to billionaire status in the process.

Hours after the UK review was released, Afterpay and Zip lost ground on the ASX where both are listed, as the likelihood of tougher regulatory regimes overseas became apparent.

Stifling stock prices and founder fortunes perhaps, but not yet innovation.

Banks raise alarm over criminal risk of BNPL sector

Interestingly, just last week the Australian Banking Association (ABA) quietly joined those concerned about the risks posed by BNPL platforms.

Without explicit mention to them, the banking peak body made a submission to Treasury outlining the threat the gaps in regulation could pose as some financial companies play by their own rules.

“The gaps have the potential to introduce new risk into the payments system or undermine the effectiveness of existing regulation, including consumer protection, and the detection and prevention of money laundering and financial crime,”

“For example, the detection and prevention of financial crime can become more difficult to achieve where a single entity does not have visibility of the entire transaction path. Some risks and harm may not become visible for some time, liability may not be clear or may fall disproportionately on traditional participants.”

While the banks clearly have some incentive to feel threatened somewhat by fast-growing fintech, their point still stands.

To leave an explosive sector to its own devices with little oversight could well hurt Australian customers who will ultimately be the ones to pay the price.